The Shtokman project is currently under the direction of the aggregated Shtokman Development AG (SDAG), jointly owned by France’s Total (24%), Norway’s Statoil (25%), and Russia’s Gazprom (51%). SDAG would have a 25 year license to explore, and operate the Shtokman Field (Штокмановское Месторождение) located within the Russian EEZ in the Barents Sea holding approximately 3.8 trillion cubic meters of natural gas and 37 million tons of gas condensate.

New information has surfaced lending to a scrapping of original project plans, and a stronger focus on LNG sea shipments. This all likely in light of recent European turmoil, budgetary constraints, recent demand issues that stem from Ukraine, and a European movement to diversify away from Russian oil and gas. I have done my best to highlight the old plan along with the potential new.

Shtokman Field - Russia - Barents Sea

Original Plan

Shtokman Field – Gas and gas condensate will be extracted from subsea wells and separated on board a floating production unit deemed to be one of the largest that will have been built. Gas and gas condensate will then be transported to the city of Teriberka (read The Economic Implications for Teriberka for more info) via two subsea pipelines.

LNG to be Shipped – From Teriberka, gas will be converted to Liquid Natural Gas (LNG) by means of a LNG Plant. LNG will then be shipped out to markets by means of LNG tankers.

Gas to be Piped to Europe – Gas condensate will be treated at the onshore Gas Treatment Unit (GTU) with the resultant gas being forwarded through on to Vyborg (Russia), along the way being compressed by several compressor stations. From there, gas will be sold to Europe by way of the Nord Stream pipeline, currently partially operational, that connects Vyborg and Greifswald (Germany).

New Developments

Industry experts have said the following concerning recent Shtokman developments;

“Shareholders are considering to scrap plans to pipe gas to Europe and to focus instead on liquifying the entire gas output to ship to global markets on tankers” – Alexander Medvedev, Deputy Chief Executive of Gazprom

“Everything is on the table now, even the possibility of Gazprom working with other foreign partners or maybe continuing the project on its own” – Industry Expert

“(Shifting to LNG) is just one of the options under discussion,” – Shtokman spokesman

Briefly – Essentially, the “Gas to be Piped to Europe” is what would be scrapped, while the “LNG to be Shipped” would double. This would have effects that would include but would not be limited to an increased demand for nuclear-icebreaker and LNG tanker production, an incentive to improve current Arctic Ocean / Northern Sea Route monitoring / search-and-rescue capabilities, and a potential increase in the average cost to export each btu (not to mention CO2 / btu) of gas due to tanker-fuel requirements.

What is important, is that both Total and Statoil seem still to be committed to the project. Albeit existing delays, a back-out from either of these massive partners would launch Gazprom into the search for new sources of funding.

Tapping Into Asian Markets – At first glance the move makes complete sense. Original plans only stood the potential to sell a portion of production to Asia. This new focus can be taken as a descent means to diversify into hungry Asian markets. If the Asia of the future holds less-than-expected demand, the LNG tanker infrastructure enables sales to other growing regions as well. Russia’s far-eastern, Sea of Okhotsk, operations are currently ill-positioned to gain from growing Asian demand, albeit a descent LNG production and shipment infrastructure, as forward contracts have mostly all been established at current production levels (Read Sakhalin Offshore Oil and Gas Reserves). SDAG would be able to sell new LNG production on forward markets at today’s relatively higher prices. *For our North American readers remember that our natural gas prices are low relative to those of world markets as Canada is severely handicapped in it’s ability to export LNG by sea (lessening competitive market forces), and new technologies have made available many new reserves and resources within both Canada and the United States.

A Hedge Against Europe – It is quite clear that SDAG stands to gain from a hedge against sliding European demand for Russian oil and gas which could in turn affect Russia’s ability to control prices. As a world leader in oil and gas exports, this potential decrease in European demand could force other Russian oil and gas producing regions to find customers elsewhere. What can be said, however, is that it takes massive infrastructure spending plagued with time lags to get oil and gas to markets via land. The sooner that Russia has the pipeline infrastructure built to connect with more of it’s southern (mostly) and western neighbours, the smaller the chance that price contracts will be held at lower prices due to ‘ability-to-deliver’ constraints.

Previous Posts

Arctic Economics has made several posts related to the Russian Shtokman project throughout the past year;

The small remote fishing village of Teriberka (Териберка) is located 130 km’s from Murmansk and has been chosen as the operating hub for Stockman Development AG (SDAG). *Read more about the Shtokman project here.* As the first LNG production is to start in 2017 the following are to be built within the coming years;

Onshore Facilities – Contract awarded to Chicago Bridge & Iron (USA)

Product intake facilities

Treatment plant for export pipeline gas

LNG plant with 7.5 million ton/year capacity

LNG Storage Tanks

Marine Terminal for condensate and LNG export

Ancillary facilities

Power station, housing village, support vessels and tugs, heliport, etc.

Job numbers are to be as follows from the SDAG website; (take note that the current population of Teriberka is estimated at 1400)

10,000 to be involved with the construction of the plant

600 to become permanent field staff

Controversy

From an article on Bellona.org, a Norwegian environmental NGO, I gathered an interview that took place with the mayor of Teriberka (Териберка). As it turns out, Shtokman Development AG (SDAG) had correctly set up public hearings, in an effort to allow citizens to address concerns that they may have had with the proposed giant gas condensate project. Activist groups, however, do not seem convinced.

Most activist organizations hold the position that the citizens of Teriberka are simply uninformed and uneducated to the point where they are literally being tricked into accepting a project such as this without protest. This, however, tends to be the main activist position with regards to almost any given controversial issue.

The people of the village do have legitimate concerns. They want jobs. The following is an excerpt from an NPR article on Russian Arctic claims;

According to 33-year-old Andrei Udin, life in Teriberka is depressing. He has tried for years to find real work. Udin likes the tough talk from Putin, the promise to fight for Arctic territory. “What’s ours should be ours,” Udin says. But after years of delay, he’s beginning to wonder if that natural gas processing plant is really coming to Teriberka.

“If I don’t have a job, natural gas does nothing for me,” Udin says. “I can’t exactly use the gas for food.” Frustration is growing around this village. People are beginning to say that unless the oil and gas riches will be shared, maybe it’s best to leave nature alone.

These are legitimate concerns. The only jobs that have been guaranteed by SDAG have been those that are to be awarded to 10 Murmansk State Technical University students. The other proposed 600 permanent field staff may very well come from other regions. We know this fact due to the proposed housing village that is to be constructed to accomodate these permanent staff member. The SDAK village is not even going to be constructed within the actual village of Teriberka, making the trickling down of benefits difficult. It is also very well possible that hardly any of the 10,000 construction jobs will be given to Teriberka residents.

I have also written about some of the environmental concerns that groups have held with the Shtokman project in general. See ‘NGO concerns over Shtokman‘.

What has SDAG contributed to the community of Teriberka?

Say what you wish about the project. The truth of the matter is that many positives will come from this. There is to be, for example, an Arctic Hotel Teriberka built by a company named “Flait Invest” that has been handling most flight, car, and hotel accommodations for the many oil executives that visit the region each year.

Among other things, Shtokman Development AG has organized the following, within the past year;

Held “Healthy Days in Teriberka”, where local residents were given the opportunity to have free medical and diagnostic examinations by Murmansk’s doctors in Teriberka

Funded an environmental excursion for the children of Teriberka

Funded a free Wi-Fi zone for the Murmansk State Technical University

Announced plans for the selection of 10 Murmansk State Technical University students to be professionally trained to work with SDAG

In November of 2011, we wrote in ‘No Decision on Tax Breaks for Shtokman‘ that Shtokman Development AG (SDAG) was looking to the Russian Federation for tax breaks. The CEO’s of Total, Statoil, and Gazprom were weary of Shtokman profitability given current tax regulations.

The three oil and gas giants were supposed to have made a final investment decision before the 2011 year end. Due to the above mentioned issues, along with another that will follow, the decision will instead be made in March of 2012 (Read the SDAG press release here)

The next ‘hinge’ is on that of Murmansk’s decision to establish a special economic port zone in Teriberka, which is to be the Shtokman Barents Sea coast hub. According to the Ministry of Economic Development, Gazprom is not ready to be a part of such a special economic zone as there are regulations that come with it that would need to either be abolished or changed.

The processing of natural resources is not allowed within a special economic zone. This would legally prevent the operation of a LNG plant.

The zone term limit within any special economic zone is set at 20 years, while SDAG is expected to operate for over 25 years.

Firms within the special economic zone would be required to register under that zone, where SDAG is registered in Switzerland.

I am uncertain as to how this is going to play out. If this project is to actually make it through the pipeline without any more lengthy delays, SDAG had better hope that there simply will be no special economic zone, or that they will be able to work with the Russian Federation in order to change some of the regulations that would be associated with such a special status.

From the Norwegian Environmental NGO ‘Bellona’ I have come across a letter to Helge Lund, the president of Statoil, to Aleksey Miller, chairman of the Board of Directors of JSC “Gazprom”, and to Pierre Nerguararian, general director of Total Russia. The objective of the letter was address concerns that the environmental group had over the potential implications of the Shtokman project. Below are some highlighted excerpts.

“The Russian Federation does not possess a marine service for spill response or a system for satellite monitoring of hydrocarbon spills in icey conditions. This translates into additional financial expenditures for creation of an infrastructure for elimination of accidental situations that must be considered, guaranteed and provided for already at the stage of project development”

This may be one of the most credible assertions. A major spill in the northern Barents Sea would not require the same style of cleaning as would BP’s most recent spill of the Gulf of Mexico for example. Thick layers of ice and icebergs would provide clean-up crews with significant obstacles. If there is more-so a lack of, or insufficient satellite monitoring system in place, it will limit Russia’s ability to respond. *I would go on to joke that Putin or Medvedev would take part in an heroic photo-op, perhaps flying a helicopter over top the spill in order to assess and map damaged zones.*

They further argued that guaranteed financing would be required

“sufficient for covering payment of damages that may result from accidental consequences to the environment (both natural and socioeconomic) as required by article 10 of Federal Law “On Industrial Security of Dangerous Industrial Installations”

This seems to be the case, at least, within the western world, as, for example, nuclear power plants are to put required amounts of money aside per every unit of electricity produced so that in the future there will be funding available to assist in the (debatably) proper removal and storage of the spent nuclear fuel. The law is the law and Shtokman Development AG would be obliged to follow this.

They made several references to the environmentally sensitive areas of the Barents sea that this project could tread upon. The most significant of which would include the bird populations that the Barents sea is in part famous for. Secondary concerns would include the

“effect of gas hydrates on flora and fauna, effect on climate, including economic evaluation of measures for minimization and prevention of or compensation for these effects.”

They go on to argue further that

“Shtokman Development AG currently lacks any climate-related policy, which can lead not only to the increase of the project’s effect on climate change, but also to an incorrect view of the profitability of the project due to underestimating risks associated with climate change. These risks include: changes in the quantity and distribution of precipitation, ice cover, increase of storms and hurricanes, sea-level rises, changes of coast line, higher incidence of disease among the population and many other aspects that require evaluation at the planning stages of the project.”

The above excerpt presents us with nothing new. The main objective of most environmental NGO’s is to force the costs related to negative social externalities from the pocketbooks of the externality producing firms that are in question. I am sure that this has been the run of the mill criticism of each and every offshore operation that has taken place off the Russian costs.

What will occur, however, through natural market forces will be the assistance to local populations via hospital upgrades, local infrastructure upgrades, and a larger press spotlight. There will be approximately 10,000 workers needed to take part in the construction of the LNG plant, among other things, along with a permanent future housing of 600 Shtokman employees. With this there are sure to be other positive socio-economic spillovers and not just negative ones.

According to the assessment presented by representatives of the company, a full accounting of environmental factors will make the project unprofitable.

This is the bottom line. Profitability. NGO’s know that major shareholders are already questioning the overall profitability of the project, asking the Russian government for tax breaks / incentives. They also know that if they can get any of their major shareholders to doubt their profitability, they may be able to help leverage the project into the graveyard. It seems to me as though the Russian government will, regardless, end up providing for Shtokman’s environmental externalities. If major shareholders are not sure about expected profits, they will simply demand compensation in some form from the Russian government.

In the beginning…, Shtokman had intended on selling much of their estimated 3.8 trillion cubic metres of natural gas and 37 million tons of gas condensate to the United States. This position was later revised as planning came to fruition, the Shtokman Development AG (Norway, France, and Russia) was pulled together, and it was then decided that must of the gas would be in fact sold to Europe. The lastest plan assumes a series of gas pipelines that connect with Europe via the Nord Stream pipeline (half of which has already been commissioned). Europe was predicted to have demanded much gas for the years that stretched past Shtokman’s commissioning date of 2017. Now that the Western world in its entirety seems to have tripped with low forecasted GDP growth rates for the foreseeable future, the increasingly uneconomical Shtokman project seems to be becoming just that – ‘Increasingly Uneconomical’.

That was then. This is now. The market is starting to feel the effects of the shale boom that is occurring across America. The incentives just don’t line up for Shtokman anymore. The world is producing more and more shale gas. The United States (as reported by the IHS) has seen shale gas production reach 34 percent of total production from a measly 1 percent in 2000. This figure is assumed to grow to 60 percent by 2035. The success of American shale since 2000 has triggered a rise in shale development in Canada, along with interest in those shale properties in Europe, Asia and Australia. This is of course almost entirely due to the new technologies that have been developed over these past years. As new gas comes to market, the price of natural gas comes down. The price will be effected by the sheer acknowledgement that massive previously unreachable reserves are now reachable. Take Statoil’s word for it;

The gas market in Europe is challenging, and the main reason for this is the shale gas revolution in the US. It has had an enormous impact on the global gas and LNG industry

Jan Skogen, President of Statoil Operations in Russia

The 3 heads of Norway’s Statoil, Russia’s Gazprom, and France’s Total have still been voicing their concerns over potential issues surrounding profitability. A continuation of gas booms across the globe are only going to hurt Shtokman Development AG’s bottom line.

(Nov, 28, 2011) The Russian oil giant Shtokman (Штокман) did not receive the news that it was looking for yesterday. For what is to be a 25 year long operation, Shtokman Development AG (SDAG) is seeking tax reform along with simple clarity. The fact that the Russian State Duma has adjourned for the Dec. 4 elections means that the Russian government will be unable to grant any provisions, changes, and or clarity until at least the beginning of 2012. (The Moscow Times article here)

The Issue – All 3 major players (Gazprom, Statoil, and Total) must come to an agreement in order to launch into the full-scale development of the Barents Sea field. They had hoped to settle taxation issues with the Russian government before making any final decisions. Due of course to the Russian elections, this is unlikely to occur until at least the beginning of 2012. Statoil CEO Hedge Lund has said that without any significant tax breaks, Shtokman could run a loss. Total’s CEO Christophe de Margerie has joked about how difficult it has been in finding tax clarity as of yet.

CNG & LNG – Amid concerns, the head of tax, customs, and tariffs for the Russian Finance Ministry (Ilya Trunin) commented on the existing Russian gas tax regime, saying that it is indeed favourably positioned toward SDAG. Under Russia’s current mineral extraction taxes and export duties, the extraction of Compressed Natural Gas (CNG) is taxed at a relatively low rate, whereas Liquified Natural Gas (LNG) has no export duty.

One half of Shtokman’s output is expected to be sold as CNG, and the other LNG.

SDAG is planning to build a LNG facility in Teriberka (Териберка) to convert CNG to LNG in order to ship the product abroad via LNG carriers.

The remaining CNG will be transported on through to Europe via the Nord Stream pipeline that begins in Vyborg (Выборг)

Opinion – “It is what it is”. Norway is well ahead of the game in building and improving on their northern infrastructures. If Russia does not launch into the Shtokman project on behalf of SDAG, it could be a detrimental blow to her potential GNP, along with her status among the Arctic nations. According to Ruskaya Gazieta, the project is projected to add 120 billion USD to Russia’s GNP. The government almost has the lower hand right now, as if it does not provide an adequate tax relief, Statoil or Total could flee. It takes years to organize for these projects. The markets will not quite be able to reflect the wealth-creating potential until final decisions have been reached, and orders to heavy industry begin to be made. Russia cannot afford to lose this right now.

The Shtokman field (Штокмановское месторождение) is one of the worlds largest natural gas fields. Lying within the Russian EEZ of the Barents Sea, it is estimated to hold 3.8 trillion cubic meters of natural gas, and over 37 million tons of gas condensate.

A pipeline (pictured in red) is to be built that will connect the Shtokman field with a liquid natural gas (LNG) terminal that is to be built in the city of Teriberka (Териберка). (Read The Economic Implications for Teriberka) From Teriberka, the oil will carry on through into Vyborg (Выборг) by means of another pipeline. Finally, the majority of the gas that is to be produced is assumed to be sold to Europe via the Nord Stream pipeline (one of two parallell lines was commissioned in Nov, 2011) that connects Vyborg (Russia) and Greifswald (Germany).

As it stands, the project is to be designed, financed, constructed, and operated by Shtokman
Development AG (SDAG), which is a joint consortium run by Total ( 24% – France), Statoil (25% – Norway) and Gazprom (51% – Russia). SDAG will hold a full license for 25 years, after which shares of Total and Statoil will be transfered to Gazprom. SDAG is headed by Yuri Komarov (Юрий Комаров), who has shown competency within the industry having headed different positions within Gazprom and it’s subsidiaries between 1996 and 2008.